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Introduction

This guide has been compiled to support students taking the Monetary Economics (ECON 210) course.

This guide is maintained by Melody Chin.

Course Objectives

This course aims to strengthen our understanding of some of the most basic questions in monetary economics: How does money promote economic exchange? What should serve as money? Why do people hold fiat money when there are alternative assets that pay higher rates of return? What causes inflation? What is the optimal rate of inflation? Is there a trade-off between inflation and output? Can the government create jobs by expanding money supply? What functions do commercial banks fulfill? What are the macroeconomic effects of the reserve requirements that central banks impose on financial institutions? What are the sources of bank failures? How can we prevent bank runs? (Some of these questions have taken on practical importance in the light of the recent financial crisis arising from the sub-prime mortgage problem.)

Our approach is to build the microeconomic foundations of monetary and other macroeconomic topics, that is, we seek to explain aggregate economic phenomena as the implications of the choices of rational individuals who aim to improve their welfare within their limited means. We begin our study with questions of the demand for fiat money, go on to introduce banking and financial intermediation, and finally look at the effects of money on output and employment. In short we investigate three broad categories of questions in this course: (I) Why does money have value in exchange? (II) Why do banks and financial intermediaries arise? (III) Why does money affect output and employment?